What is ADM’s Plan?

I’ve been wondering: what is ADM’s plan with this Ethanol Roll-out? ADM is the market leader in fuel ethanol production. It has intrigued me as to what its strategic plan is in this growing market. Can it keep its market share? There are a lot of variables regarding ADM’s ethanol play (and indeed the biofuels market as a whole). But I wanted to just look at a few details of ADMs financial statements in order to answer some high-level questions.

How much would ADM need to grow in its capacity base in order to keep its current market share?
Currently, ADM holds a substantial market share of the Fuel Ethanol market. According to the Renewable Fuels Association, ADM produced around 1 Billion gallons of ethanol. The U.S. produced 4.8 Billion gallons. George Bush stated in the 2006 State of the Union that he is pushing for 35 Billion gallons of fuel ethanol production by 2017. That’s a huge order.

If you do the math on this goal, the fuel ethanol industry will need to grow at 16% per year every year to hit 35 billion gallons (from 4.8 Billion gallons in 2006). ADM, however, will need to grow its base by 20% in order to keep its 22% market share. That’s a hefty order.

Figure 1: Projected Ethanol Market to reach 35 Billion gallon goal
Note ADM’s required market share to maintain its 22% market share.

However, the important thing to note is that in order to reach these projections, ADM will need to increase its Property, Plant, and Equipment holdings by the dollar amount needed to reach these year-over-year production capacity requirements. Even at $1.5 / gallon of capacity this is a tall order (please note, however, that the government’s recent investment of $300Million+ dollars for 200MM+ gallons of capacity for 6 projects accounted for about 1/3 of those projects’ overall funding base. That means that these 6 facilities totaling 225 Million gallons of capacity cost about $1.2 Billion. That’s an install cost of $5.3 / gallon of capacity).

Can ADM grow its business enough to finance this type of expansion?

Let’s assume the capacity install cost is $1.5/gallon of capacity.

This will mean that ADM will need spend at least $10Billion dollars over the next 10 years on plants (at $5.3/gal capacity they will need to spend $35Billion). That’s a lot of cash to spend.

Figure 2: Capital Expenditure Requirements for 20% Capacity growth

ADM’s equity growth rate was 16% last year. It’s sustainable growth rate was 13%. Not bad for them, but it indicates that they need to make some big changes in their business order to grow at the rate that they would need to in order to keep up with the proposed capacity. Simply put, it needs to be able to generate a lot of cash (in fact, it’s been losing cash up until 2006). ADM would need to add cash to their assets according to the schedule in Figure 2 every year. This is on top of their normal business operations.

Let’s say that ADM decides that they will only commit to growing their capacity by 5% year-over-year. What impact would this have on its business.

Deciding to grow its capacity by 5% year-over-year would require an investment of $1.14 Billion over the next 10 years. That’s still a lot of money, but seems more doable.

Figure 3: ADM Market Share at 5% Capacity Growth

ADM has over a $Billion in cash on their balance sheet. They definately have some good momentum right now to generate some cash in the coming years (although turmoil in the Ag industry could hit them where it hurts). So they certainly could finance this much over the next 10 years. However, they would only end up with a 5% market share of the Bush plan. Is that worth the money? Is there a more strategic use of this capital? Would this be better than, say, buying a bunch of stock in Apple (they should have sold a few hundred million iPhones by then)? I think this brings into serious question ADM’s long-term play in this industry and if it is really something good for their shareholders.

* * *

So what’s ADM’s plan? The reality is that they don’t have the financial strength to keep up with the Bush plan of ethanol growth (other than the biggest share issue I’ve ever seen). They’ll probably keep a modest growth rate and work at getting low-cost capacity online (different technologies?). They simply don’t have the money in-house to build the capacity themselves. Partnerships and the like are another matter entirely, but it’s not clear that ADM would want to partner with, say, a private equity syndicate. It has its own shareholder needs to keep in mind. It could spin-off its fuel company to create a more focused entity in that market and begin to invest in directions not totally consist with ADMs food businesses (say biomass or carbon gasification).

The point to note about this quick look at ADM is that all other players will be in this same predicament. It’ll be a real trick getting to the level of capacity that the Bush plan is pushing for.

Is the Bush plan feasible? Will there be 35Billion gallons of demand by 2017? We’ll look at the demand side a bit later. But I will guess that it is technically possible. There are some good technologies out there that we know a lot about (thermoprocessing, etc) and can add some additional innovations to them to get them going.

The punchline for ADM is that as the market stands right now it is not well placed to play in this market down the stretch. Other players will need to enter in order to hit the 35Bil target. New technologies that ADM has no expertise in will have to be brought in to hit the projection.

There’s more to this picture than can be told from the ADM point of view. But there are many other elements that remain ominous in this market:
- What’s the transportation impact?
- What technologies have legs right now?
- What will the demand be down the stretch?

Add to Technorati Favorites

GM’s Not so dumb

This is a bit of a departure for this blog, but being a Detroiter, I have some issues with an article written on GM’s strategy:

CNN: Dead Brand’s Walking

The article notes a few items:

1) Kill Buick:

It is past time to perform euthanasia on Buick. Successive waves of new models haven’t moved the needle on sales and it is unlikely that the new Enclave crossover will make a big difference. For nostalgia buffs, the Buick brand can soldier on in China, where it is uniquely beloved.

My response:
This is a bit of a tough call. But the author’s attitude is that somehow China’s like of the Buick brand is quaint and doesn’t need to be taken as a strategic imperative for GM. The reality is that Buick is the biggest luxury brand in China. China’s the future for GM. So weather you care to see it in the U.S. (and apparently you haven’t been to Detroit lately because they’re everywhere), it still is going to be on the forefront of GM’s brand strategy. The verdict is that Buick HAS to stay and GM needs to put in a few Billion to revive the brand. Further, the Chinese should be the ones to revive the design styling for this brand. Wouldn’t that be interesting….

2) Kill Pontiac:

Pontiac should get the same treatment, though without the Asian escape hatch. Its boy-racer image is dated and GM’s one-time excitement division has deteriorated into a regional blue-collar brand. In a world that increasingly is going green, there is little upside for its testosterone-laced pavement rippers.

My response:
While I don’t disagree with the thought of killing Pontiac (although it hurts me to say it), the author’s premise is wrong. Apparently, he doesn’t know of the underground racing movement that has developed in major cities around the world. The Fast and the Furious movies are based on this movement. Pontiac has been noticeably absent from this movement and Honda’s Civic has been the central character. Toyota’s Scion brand attempts to tap into this demographic – cheap, highly customizable cars. Pontiac could also be relevant to this demographic, but could not be a big cost for GM. This is a bit of a decision for GM, but Pontiac could be redeveloped into something relevant.

3) Kill Hummer:

Whatever noble intentions GM had for Hummer, they have been permanently damaged by the greenhouse gas debate. Hummer should be sold to whomever winds up with Jeep after Chrysler is broken up. More Jeeps fall off the truck on the way to the dealer than Hummer sells in a week.

My response: This might be right. It was fun while it lasted. They’re great trucks, but at this juncture they’re a novelty. Hummer *could* be a great brand opportunity for GM down the road. The value here can be gained not on the brand side, but on the operations side. Meaning GM needs to be able to have such a flexible manufacturing process that they can throw in the occasional hummer (just as Toyota does in Japan where they can make a Prius on the same line as one of their minivans or Civics). Their distribution model should still hold and create value for GM – even in low volumes. Hummer will be more relevant, however, if they can use it as a test-bed for making alternative fuel technology that provides high horsepower.

4) Kill GMC:

Turn GMC into a commercial truck brand. As gasoline becomes more expensive, there won’t be enough traffic in personal-use trucks for GMC to share with Chevy. There are lots of opportunities with huskier trucks that a player with GM’s scale could exploit in the business-to-business market.

My response:
GMC is a bit of a strange duck. I mostly agree with this thought. However, there is a market for high-level power-trucks. These would compete with the Ford F250 and up series. But they don’t get the benefit of the brand overlap that Ford enjoys. The F-series is the entry level super-duty truck (even though it’s not really). The Silverado holds this post for Chevy. How do they get the overlap? Do they need it? Ford’s brand strategy isn’t actually worth copying in some respects. So this is a tough one. The real problem lies in Chevy’s relevance as a brand (more on that below).

5) Kill Saab:

Say goodbye to Saab. With its perpetually tiny volume and high-cost European manufacturing base, Saab has defied GM’s efforts for nearly two decades to make it consistently profitable. The success of Japanese sport-luxury brands Infiniti and Acura has made Saab irrelevant.

My response: I agree. It’s a good brand, but it’s not worth it. It’s not clear to me that it’s even relevant in Europe anymore. Saturn and Opel have become more relevant from a design standpoint and they can continue to push their current design direction.

6) Keep Chevy:
I agree that Chevy should be kept. But this brand has lots is design direction. Chevy actually has some interesting cars, but they’re not coordinated in any way. This brand needs to be refocused to compete with Honda. The Silverado is great. The new Impala is good on paper, but lacks the visual appeal that the Accord has. It’s also traditionally a muscle car which isn’t really in-line with the recent developments. The Malibu is a stupid name, but an okay car. The Cobalt isn’t so terrible, but no one would buy one over a Civic (even though a Cobalt would kill a Civic in a race – as though that mattered).

But most notably, the Saturn line has become much more relavent as a brand than Chevy – a crazy development if you think about it. In fact, it’s not clear that the current batch of Chevies should be kept in light of the great path that Saturn is going down. This is a difficult delimma that GM needs to focus on immediately.

Car Tech: Step it up
GM needs to also re-invest in Car Tech. All this horsepower doesn’t help much when you’re in traffic. But car tech is making the time pass. OnStart is a great. Ipod adapters are a good start. But let’s stop playing around – the future is going to be a full UMPC with both WiFi and cellular broadband capabilities. They’re still messing around with DVD-based mapping systems that aren’t even better than Google Maps. Can you imagine a fully capable, broadband PC in your car? That’s the next big thing.

Nuff said. Back to biofuels….

Add to Technorati Favorites

Fuel from CO2: Now we’re getting somewhere

Technology Review Article: Making Gasoline from Carbon Dioxide

This is the most significant article I’ve seen in all of the research I’ve done on biofuels. I’ve stated in a few other blog postings that my personal bet in an end-game type solution is something that utilizes an abundant material within its natural energy flows. Solar-derived Hydrogen has been one solution that’s been floating around. The notion of converting solar-derived electricity into chemical energy is compelling. Hydrogen, however, has many limitations.

The research noted in this article, performed by researchers at UC San Diego, is significant because it implicates converting solar electricity into chemical energy using CO2 as the transfer agent. It’s consuming something we have in excess (CO2) and utilizing it to make a versatile fuel source from it.

It’s a rarity that any process actually consumes CO2. In fact the article notes this:

At least at first, such a process will not make a significant impact on reducing greenhouse gases in the atmosphere–that would take quite large-scale operations, Kubiak says. But “any chemical process that you can develop that uses CO₂ as a feedstock, rather than having it be an end product, is probably worth doing.” He adds that “if chemical manufacturers are going to make millions of pounds of plastics anyway, why not make them from greenhouse gases rather than making tons of greenhouse gases in the process?”

But the real notion here is that we can finally utilize any carbon-based fuel as part of a whole system. As it stands, we dig up carbon under the ground and convert it, via our cars, into carbon dioxide. This is a one directional system. We have no other way of getting it back into the ground. The only other naturally occurring process that metabolizes CO2 are plants and trees. However, we’ve been steadily destroying those over the years – we probably should have been growing 100X more of them to keep up with our oil consumption (we probably still should regardless).

The research notes the process would work as such:

In the prototype device, sunlight passes through carbon dioxide dissolved in a solution before being absorbed by a semiconductor cathode, which converts photons into electrons. Aided by a catalyst, the electrons react with carbon dioxide to form carbon monoxide at the electrode.

It’s not known how scalable this process is or how stable it can be made.

The carbon monoxide that can be generated can be combined with hydrogen (also made from solar?) and pyrolyzes into syngas. Syngas can be converted via Fisher-Tropsch process into a variety of hydrocarbons (ethanol and butanol included). There are a few companies utilizing this thermoprocessing technology including RangeFuels in Lakewood, Colorado. It’s a costly, but effective process that is gaining in attention. This type of process could be a great first step towards creating powerful solutions to this problem.

Add to Technorati Favorites

Biofuels on the road

Just some examples of how individuals are using biofuels:

Pimp My Ride race of retrofitted Impala and 2007 Lambo:

San Francisco’s first Biodiesel Station (CNet):

Las Vegas Hydrogen station (CNet):

Add to Technorati Favorites

PG&E’s plugin hybrid – crazy like a fox

PG&E recently demoed this plug-in Hybrid that is designed to be able to also “upload” power back into the grid. Below is a video from RED HERRING:

Their premise is that customers will be able to recharge their cars during the day with cheap electricity and sell it back to them during expensive peak day hours.

This seems backwards at first – sell low, buy high? But this is really an innovation in demand shaping. During very high peak hours, utilities purchase electricity from other utility companies around the region at inflated prices. If none is available, they go to rolling brown-outs or black outs (I’ve personally had one of my plants shut down multiple times in one summer). This is extremely costly to the utility and taxing on their equipment. You’ll recall the phone taps of Enron phone representatives talking about price gouging old-ladies in California – this is that same scenario.

Using a plugin hybrid in this manner would allow them to transfer electrical supply to customers and have them store it in their cars until it is needed during the day. Increasing utilization during off-peak hours is more cost effective (higher revenues over their existing equipment). Access to additional supply during peak-hours at their current market rates (WAY less than inflated rates from neighboring utilities) is less taxing on the grid and preserves their operational costs.

So this is a good idea if there’s enough volume of plug-ins. This could further stabilize our electrical grid and even out some of the overall load they will need to manage.

Add to Technorati Favorites

ADM and Metabolix team up for plastics

Metabolix and giant Archer Daniels Midland are teaming up to make biodegradable plastics.

CNet Article: Plastic goods for your compost heap

This is a timely partnership. The City of San Francisco is well on its way to banning the use of petroleum-based plastic bags. Ikea is now charging customers for plastic bags – a personal petroleum tax if you will. The plastics from this partnership, could be tapping into these market dynamics. Although it should be noted that consumer demand for the more expensive bioplastic bags isn’t quite clear (but it should be pretty good for tree-hugging San Francisco).

Couple of points:

By contrast, things like plastic bags–part of the 350 million pounds of plastic created every year–remain in the environment “virtually forever,” Barber said. The petroleum to make these plastics accounts for 10 percent of the oil the U.S. consumes, he said.

The 10% number is consistent with the 2004 study of U.S. consumption of energy conducted by Lawrence Livermore National Labs.

American Excelsior has already developed a line of plastic stakes to hold down its erosion prevention blankets. The plastic stakes are better than metal stakes because they will not rust in seawater and don’t require crews to retrieve them at the end of their use, said Jerry Bohannon, director of earth science at American Excelsior.

These are good applications, but they’re not ground-breaking. I don’t know any company that is rushing out to make plastic forks – biodegradable or not. So I’m surprised that we are getting reports of “nice-to-have’s” instead of real, groundbreaking product developments. Can you at least make a cell phone casing out of this stuff? With a nice feel and stylish look to it? Can it be formed and machined into more versatile shapes? Better home insulation? I hope that biodegradable forks and erosion-resistant stakes isn’t the killer app for these types of products.

Add to Technorati Favorites

Virgin Atlantic deal with Boeing

Virgin Atlantic has signed a new deal to purchase 15 of the fuel-efficient 787 with an option to purchase another 28. Further, they will conduct a test to fly one of VirginAtlantic’s 747-400 using a biofuel – presumably biobutanol.

CNBC video (6:16):
http://video.msn.com/v/us/v.htm?g=46c12042-a8a3-44d3-adf5-115b7cbb1e4e&f=&fg=copy

All told, this is a $2.8 Billion deal.

Add to Technorati Favorites

Ontario’s next

Ontario, Canada (my next door neighbor growing up) has moved towards phasing out the use of incandescent lightbulbs. California has also begun such an initiative already and apparently it’s catching on fast:

Ontario is hardly alone. Australia announced in February that it plans to ban incandescent bulbs, and California is considering similar legislation. Big corporations are joining the movement.

Wal-Mart, for instance, aims to sell 100 million compact fluorescent bulbs — the most common and more affordable type of energy-efficient bulb — by the end of the year.

While I think this is a good thing from a social benefit point of view, this doesn’t seem quite ready for prime time. Speaking personally, I have fluorescent bulbs in my house, but not in some of my lamps. They just lack some of the ambiance that incandescent bulbs have. But I agree with the sentiment. For some reason I get the feeling that there’ll be some kind of incandescent bulb speak-easys after all this is over and done with.

(Technorati Profile)

Add to Technorati Favorites

New Biofuels IPO: Did somebody call 1998?

PEHub is reporting Imperium Renewables is planning to file for an IPO later this year:

Imperium Renewables Inc., a Seattle-based biodeisel producer, is planning to file for an IPO later this year, according to VentureWire. The $200 million-$300 million offering would value the company at over $1 billion. Imperium is run by former venture capitalist Martin Tobias, and has raised funding from such firms as Nth Power, Technology Partners, Vulcan Capital, BlackRock Investment Management, Capricorn Management and Silver Point Capital.

Let’s note a few things:

1) This company only has a little over 100MM gallons in production capacity.
2) This company has raised over $100MM in investment from venture capital sources (Nth Power, Technology Partners in particular).

This seems very pre-mature for an IPO opportunity. In particular, this IPO seems more like it’s an exit opportunity for the investors more than it is a “coming out party” for this company. This is too high a valuation for a commodity-based business.

This isn’t an internet company where traffic can be substituted for actual cash flows. But with commodities, cash is king – and this is still a narrow margin business. Having this large of an issue for a company that produces so little volume seems premature.

It seems to me that an institutional investor would be a better partner at this stage in their development. Goldman Sachs has made an investment in Canadian cellulosic ethanol producer Iogen. While an investment bank not be a strategic partner, there may be others.

This type of IPO is reminiscent of the late 90’s/2000 internet boom and bust. This is a company that centers around a nascent product line (biodiesel still has not gained wide acceptance) and commodity pricing (i.e. potentially narrow margins). The market values stocks based on their earnings. Its not clear that Imperium as a public company will have strong earnings based on its current capacity, proposed capacity, and feedstock sourcing contracts. So while this company still has an improved social benefit, business is still business.

On a broader note, this could be a dangerous move by Imperium. While they can go public if they want, the market does not want to have any more unstable companies get listed on the exchanges. There have been a number of bad IPOs get listed in the last year: Vonage, Burger King, SunPower to name a few. With public companies getting taken off of the exchanges through private equity buyouts, the market needs good equity products to come on board. Imperium could face a backlash if it goes public in this climate.

Add to Technorati Favorites

Ethanol Controversy

Ethanol is gaining in its detractors in recent months. High corn prices are the main complaint. But this new report of research conducted by Stanford’s Marc Jacobson adds fuel to this fire.

Science News Article: Clearing the air on ethanol

This research consisted of evaluating the air quality and dynamic effects of a hypothetical Los Angeles. In one scenario, it evaluates cars using 100% gasoline; the second scenario evaluates the use of E85 (85% ethanol, 15% gasoline).

Some points from the article:

His results, published today on ES&T’s Research ASAP website (DOI: 10.1021/es062085v), show that ethanol is no silver bullet for health. Switching to E85 blends (85% ethanol, 15% gasoline) could result in slightly higher ozone-related mortality, hospitalization, and asthma (9% higher in Los Angeles and 4% higher in the U.S. as a whole), the study finds. Cancer rates would be similar for gasoline and E85.

This research brings up more questions than it answers. While the CO2 decrease is good, the notion of having carcinogens in the air is about equally distressing (both my parents are cancer survivors). But this also seems like something that can be controllable at the point of emission. But what do I know.

Add to Technorati Favorites